1 Oil Company LinnCo Really Should Buy

Photo credit: LINN Energy

LinnCo was created by LINN Energy with two goals in mind. First, it was to be an acquisition currency that LINN could use to buy C-Corps. That then fulfills its second purpose which is to help LINN Energy to grow its distribution, which would trickle down to dividend growth for LinnCo.

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While there are a lot of solid C-Corps LinnCo could buy, most are focused on rapidly declining horizontal assets, not the low decline conventional assets that LINN Energy really needs to

add to its portfolio.

Photo credit: LINN Energy

LINN Energy is finding that horizontal assets are having too great of an impact on its current decline rate, which is a deterrent

to growing its distribution and LinnCo’s dividend. That’s why

we’re seeing LINN trade out of higher declining horizontal assets

for lower declining conventional properties

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LINN’s best option for adding really low decline assets is to

buy enhanced oil recovery projects. Given that Denbury Resources is focused on these

assets makes it the perfect company for LinnCo to acquire. As the chart to the right notes,

the first year decline rate of Denbury’s EOR assets are well below the rate of other basins.

Source: Denbury Resources Investor Presentation

LINN Energy is new to EOR having invested in its first EOR project in 2012 when it acquired a joint venture

interest in a project in the Rockies.

Source: LINN Energy Investor Presentation

In acquiring Denbury Resources LINN Energy could add a whole EOR business unit. That’s because

Denbury Resources not only owns the mature oil fields that are perfectly suited for enhanced oil recovery, but it owns the critical carbon dioxide

assets required to flood those fields.

Denbury Resources not only owns the mature oil fields that are perfectly suited for enhanced oil recovery, but it owns the critical carbon dioxide

assets to get to able to flood those fields.

Source: Denbury Resources Investor Presentation

Denbury Resources not only owns the mature oil fields that are perfectly suited for enhanced oil recovery, but it owns the critical carbon dioxide

assets to get to able to flood those fields.

Source: Denbury Resources Investor Presentation

These assets would be an exceptional fit for LINN Energy and LinnCo: It would fuel growing high-margin cash flow.

Denbury Resources is now using this cash flow to pay a dividend, while still growing production by 9%-12% this year.

Longer term Denbury Resources expects its production to grow 4%-8% annually, with its dividend likely growing at around that same rate.

Synergies from the combination of Denbury’s Rockies position and LINN Energy’s Salt Creek JV

LINN Energy entered into a JV at Salt Creek in order to benefit from Anadarko’s extensive EOR experience.

An acquisition of Denbury Resources would add the expertise of America’s EOR leader.

Further, Salt Creek could be combined with Denbury’s assets and used as a growth platform to acquire additional assets in the Rockies.

Adding Denbury’s low decline assets would reduce LINN Energy’s base decline rate.

Many of Denbury Resources’ fields will see inclining production for several years before the decline rate sets in.

This would decrease the amount of maintenance capital spending at LINN Energy.

It would then enhance distributable cash flow and fuel a dividend increase for LinnCo investors.

At just a $6.25 billion market cap Denbury Resources would be an easy to swallow deal for LinnCo and a credit positive for LINN.

LinnCo has already been used to fund the $3 billion in equity needed to acquire Berry Petroleum.

Denbury Resources only has $3.5 billion in debt and its debit-to-EBITDA is 2.6X.

The equity heavy deal would push LINN’s debt metrics into a more comfortable range.

Investor takeawayDenbury Resources is filled with low-decline oil properties and extensive EOR

knowledge. It also produces a lot of cash and comes with little debt. That makes it a perfect oil company for LinnCo to buy as it is a very compelling strategic fit for LINN

Energy.

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